We’ve all heard the popular phrase ‘don’t mix business with pleasure.’ The same concept can sometimes be applied to situations where an entrepreneur seeks start-up funding from friends and family—or anyone within a close personal network. It’s easy to make an ‘ask’ for funding to a close friend or family member, rather than pitching to strangers at a venture capital firm or several of your local banks. However, it is important to keep certain ‘ground rules’ in mind if you do decide to borrow money from (or lend to) a friend or family member. This will help to ensure that in the future there is no argument or disagreement about the terms of the loan.
There are many articles and books that broach the subject of lending/borrowing investment and start-up capital from friends and family. Recent articles from Entrepreneur.com, Forbes.com and the online Wall Street Journal discuss ways to approach the ‘ask’ and ways to evaluate whether or not the investment would be a worthwhile opportunity.
Things to consider before asking to borrow from friends & family
If you decide that you’re going to ask a friend or family member to loan you money for your business or start-up, remember to tackle the following issues prior to the ‘ask’ to be better prepared:
- Create a solid business plan: Identify the market and competition, important financial aspects, and show the projection of anticipated growth
- Put the terms of the deal in writing: Having a legal document clearly outlining all terms of the agreement will be useful if one person is delaying on payment or the other is asking for something that was not initially agreed upon
- Set clear repayment terms: Be sure to define your rate of interest and when/how frequent payment will be; your investor, albeit a friend or family member, wants to know when you plan to start paying him/her back—set goals and stick with them
Things to consider before lending to friends & family
As much as you may want to help a friend or family member who approaches you for start-up or business funds, the following are some things you should consider before saying ‘yes’:
- Discuss other options: Perhaps there is a way you can assist the venture that doesn’t involve finances, such as being on the board of advisors or assisting in the marketing plan
- Have clear expectations: Create a loan schedule and discuss ‘next steps’ if a missed payment were to happen; make sure the individual knows that this is a loan and not a gift
- Put it in writing: As noted when considering borrowing money from a personal contact, it’s important to also ask for terms in writing if you’re on the lending end of the agreement to avoid any confusion in the future during the repayment process
Would you consider letting friends and/or family invest in your business or loan you start-up capital? What terms would you set? If you have loaned to others, what are some questions you asked before investing?
To read more about some of the issues involved with borrowing from or lending start-up money to friends and family, please visit the following:
Thanks for reading, and until next time… stay WISE!